Correlation Between Royal Bank and HSBC Holdings

Can any of the company-specific risk be diversified away by investing in both Royal Bank and HSBC Holdings at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Royal Bank and HSBC Holdings into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Royal Bank of and HSBC Holdings plc, you can compare the effects of market volatilities on Royal Bank and HSBC Holdings and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Royal Bank with a short position of HSBC Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Royal Bank and HSBC Holdings.

Diversification Opportunities for Royal Bank and HSBC Holdings

0.82

Correlation Coefficient

Royal Bank  HSBC Holdings

Very poor diversification

The 3 months correlation between Royal and HSBC is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Royal Bank of and HSBC Holdings plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HSBC Holdings plc and Royal Bank is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Royal Bank of are associated (or correlated) with HSBC Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HSBC Holdings plc has no effect on the direction of Royal Bank i.e., Royal Bank and HSBC Holdings go up and down completely randomly.

Pair Corralation between Royal Bank and HSBC Holdings

Assuming the 90 days horizon Royal Bank is expected to generate 1.17 times less return on investment than HSBC Holdings. But when comparing it to its historical volatility, Royal Bank of is 1.31 times less risky than HSBC Holdings. It trades about 0.08 of its potential returns per unit of risk. HSBC Holdings plc is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  3,239  in HSBC Holdings plc on September 24, 2024 and sell it today you would earn a total of  1,381  from holding HSBC Holdings plc or generate 42.64% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Royal Bank of  vs.  HSBC Holdings plc

Royal Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Royal Bank of are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Royal Bank is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

HSBC Holdings plc

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in HSBC Holdings plc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental indicators, HSBC Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Royal Bank and HSBC Holdings

The main advantage of trading using opposite Royal Bank and HSBC Holdings positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Royal Bank position performs unexpectedly, HSBC Holdings can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in HSBC Holdings will offset losses from the drop in HSBC Holdings' long position.

The idea behind Royal Bank of and HSBC Holdings plc pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.